Ahead of budget signing, Moody’s affirms Virginia AAA bond rating

BY MICHAEL MARTZ Richmond Times-Dispatch, June 6, 2018

Virginia’s new budget just passed its first test, even before it is signed by Gov. Ralph Northam.

Moody’s Investors Service reaffirmed the state’s AAA bond rating and stable financial outlook on Wednesday, a day before Northam is expected to sign a pair of budget bills that will boost the state’s financial reserves to allay jitters on Wall Street.

The budgets, one for the current fiscal year that ends June 30 and the other for the next two years beginning July 1, also will expand Virginia’s Medicaid program and pay for the state’s share of the cost with money from a new tax on hospital revenues.

Moody’s said the arrangement will leave Virginia “less exposed to potential future cutbacks in federal Medicaid spending” than most other states.

The decision by Moody’s, one of three national bond-rating agencies that advise investors on their potential risks, represents the first hurdle Virginia has cleared in reassuring Wall Street financial institutions that the state is operating with a structurally balanced budget and ample reserves against future economic risks.

Finance Secretary Aubrey Layne privately relayed Moody’s decision to Northam and said the governor called the report “very positive” for the state.

“Governor Northam is pleased that the passage of a balanced and fiscally prudent budget that expands Medicaid has already affirmed Moody’s confidence in Virginia bonds,” spokesman Brian Coy said in a statement. “He looks forward to continuing to work with the General Assembly and all Virginians to build on this momentum and make our commonwealth work better for every family.”

Virginia is one of 12 states with AAA ratings from all three national agencies for the bonds it sells to investors for a wide variety of state capital projects, from a new General Assembly Building to dormitories and research buildings at public colleges and universities. The AAA rating enables the state to borrow money at lower interest rates, saving public tax dollars over the life of the bonds.

“This is not just academic stuff,” Layne said. “The rating is very serious to our citizens.”

Protecting the AAA rating has been a top priority for state officials and legislative budget leaders since S&P Global Ratings downgraded Virginia’s financial outlook from stable to negative in April 2017. S&P has not yet reacted publicly to the General Assembly’s adoption of a new budget, which Northam will sign on Thursday in a ceremony on the South Portico of the Capitol.

The General Assembly adopted the budget May 30 after seven weeks in a special session that Northam called after the legislature adjourned its regular 60-day session March 10 without a budget because of a political impasse over Medicaid expansion. The new budget represents a compromise that House Appropriations Chairman Chris Jones, R-Suffolk, and Senate Finance Co-Chairman Emmett Hanger, R-Augusta, negotiated in order to win approval in a sharply divided Senate.

“I am very pleased that Moody’s has reaffirmed Virginia’s bond rating,” Jones said Wednesday. “I believe their actions are reflective of the General Assembly’s commitment to build up our cash reserves, make investments in education and meet the needs of Virginia business through workforce development.”

Senate Majority Leader Tommy Norment, R-James City, said via text message that the Moody’s report was “no surprise to me. I repeatedly said during the session the threat of losing AAA was demagoguery and false assertion to try to scare legislators into voting for expansion. Complete poppycock.”

S&P downgraded the state’s financial outlook last year while reaffirming its AAA rating because of concern over Virginia’s depleted Revenue Stabilization Fund — also called its rainy day fund. Withdrawals from the fund to balance the current budget lowered the reserve to $281.7 million, or about 1.4 percent of state general funds. That level is the lowest among the 14 states that S&P rates AAA.

Similarly, Moody’s previously had cited low reserves “as a factor that could lead to a downgrade,” Public Resources Advisory Group, an outside state consultant, said in a report shared with legislators last month.

The pending budget appropriates an additional $90 million for the cash reserve, on top of the $156.4 million already pledged from excess revenues carried over from the fiscal year that ended June 30.

However, Layne said a surge in income tax payments after President Donald Trump signed the Tax Cuts and Jobs Act on Dec. 22 could produce additional revenues of more than $500 million in one-time payments of income taxes not withheld from paychecks, such as those paid on capital gains.

The budget projects the combined revenues held in the new cash reserve and the rainy day fund could exceed $976 million at the end of the biennium in mid-2020. That would represent about 5 percent of the state’s general fund revenues.